I've co-written 7 books on investments and personal finance with Ken Fisher, CEO of Fisher Investments, 5 of which were national bestsellers. I also led the development of the Fisher Investments On series, a collection of educational guides published by Wiley covering the primary investment sectors—from energy to consumer staples to health care—with in-depth analysis on the economic, political, and sentiment forces influencing each.

Ron Paul, Greece and the Tin Standard

With Ron Paul still in the running for president, it’s become popular (again) to call for a return to the gold standard.

Gold standard fans’ chief argument tends to be the Fed (and all central banks) is an egregious government intrusion. They further posit we can achieve a utopic state of economic stability by “ending the Fed” and pegging currency globally to gold.

Except it takes a heck of a lot of intervention to get currencies to stay pegged to anything—whether it’s a chunk of decorative metal or not. A peg must be constantly jiggered. Why? Gold is pretty darn finite, wealth is not. Only so much gold exists above ground, and we only extract a bit more annually. Yet, while gold was sitting inert in bank vaults, Steve Jobs (RIP) created massive shareholder value and global wealth out of an idea he had then pursued in his garage. Bill Gates too. Chuck Schwab. Sam Walton. Sergey Brin and Larry Page. Mark Zuckerburg. Bethenny Frankel. They all created something out of nothing, packaged it, marketed it and sold it to people who believed that product had value.

In a world where wealth isn’t zero sum, tying money to a fixed hunk of anything requires a massive amount of intervention—by the government. To believe otherwise means adopting a mercantilist view of the world that doesn’t explain the existence of Skinnygirl margaritas and Angry Birds.

And what wretchedness has befallen us since we went off the gold standard in 1971? We had gross monetary missteps in the 1970s leading to hyperinflation, yes. A global phenomenon, not one unique to the US. But starting about 1982, inflation has steadily fallen. Interest rates are and have been very benign for years! Headline CPI was also much more volatile on the gold standard than off. US GDP was about was about $1 trillion in 1971 (in current dollars) and is now about $15 trillion. Global stocks have risen 2,946%. Incomes have risen steadily. Your phone (which cost you $300) can out-compute any 1971 warehouse-sized supercomputer (which cost a big firm many millions). Overall, we seem to have done ok.

Plus, the world before fiat currency wasn’t inherently more stable. Nor was the world pre-Fed particularly glorious. The very frequent bank panics of the 19th century and early 20th were often followed by 4- and 5- and 6-year Depressions.

Now, some argue gold is real and fiat money fake. Fair enough. Under the fiat system, currency has value only because we all agree it does. It’s psychological. It’s the Matrix! But it’s the same thing with gold. Gold doesn’t have inherent value. It’s worth what someone is eager to pay for it relative to someone’s eagerness to sell it. It’s worth more than tin because gold is more scarce and, thousands of years ago, we decided gold was prettier.

Mind you, I have no great love for the Fed. It’s plausible their autonomy (or lack thereof) is sometimes perilous. But there’s no such thing as a static set of rules politicians play by—ever. They change the rules when they want, and they’ll do that with gold too.

A final point: Greece wouldn’t be better off on a gold standard. Greece doesn’t suffer from a lack of credible currency. A credible currency is basically all Greece has going for it now. Greece suffers from decades of socialism making its economy utterly uncompetitive. The last thing Greece needs is Greek politicians managing a gold peg to the drachma. Zeus save us all.

This constitutes the views, opinions and commentary of the author as of February 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.

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I was looking at this idea regarding “Fed and Fort Knox. then peg the dollar to the gold at whatever amount that comes out to” and came up with this (which I would like to hear views).

Estimates as to the holdings of Gold for the Fed and F Knox come to around: 12,300 Tons or @ 434 million ounces (i understand this is optimistic).

At today’s prices @1750 that would be @760 billion dollars.

If, as I understand it, the quantity of dollars is rougly equal to the size of the US federal debt say 14 trillion, in order to retire the dollars the peg would have to value the ounce of gold at around 49,000 USD per ounce.

At that level no one would bother going to the window but it wouldn’t also realize the debasement of the currency?

As I understand it alternatives to this would have a dual track policy with gold backed new dollars and the retention of the fiat system at the same time.

The housing crisis has discredited the belief that central banks can implement or formulate optimal interest rate policies. The double whammy of massive sovereign and private debt has discredited central bank policies aimed to facilitate borrowing. The current generation understands that instead of being blessed by spending borrowed money, they will be cursed with servicing these massive debts across the coming decade(s) of stagnant growth. Please listen to Ron Paul explain the gold standard for just 5 minutes. http://www.youtube.com/watch?feature=player_detailpage&v=XxkGttK53P0#t=106s

Lara, I am sorry, but your arguments are lame. If you consider (government measured) CPI and add increase to money supply, perhaps you will find that global GDP has barely moved. Focus on “developed” economies – those with the propensity to print – and your GDP argument falls flat as the entire gain and then some is dwarfed by increased money supply. Gold mining easily outpaces population increases and the fact that the total value of gold is about $9T vs $32T in stocks – what does that have to do with anything? Perhaps under your interesting view of the world, it only means that gold should be about four times higher priced than it currently is – $6500/oz will solve your dilemma. Perhaps you would be more comfortable with copper, oil, or some other commodity as a grounding for currency. Fiat currencies only make the poor, poorer. Anyone with a fixed income, paying for more and more expensive goods will be the big loser. Governments get the poor vote with the promise of free stuff (paid for with monopoly money). It not only makes the poor dependent on the government, but the increased price of goods outpaces the government’s stated CPI. The national average gallon of gasoline was $1.73 the day Obama took office and is twice that today (not just 3%/yr), while the U.S. has more oil than ever before. Print more dollars and each is valued less – you better find something you are comfortable tying your currency to – is your jewelry made out of tin or do you value gold?

I think JFK had a good idea with silver. Much more plentiful than gold. But the biggest issue isn’t the currency itself it is the Federal Reserve printing money for the government at interest, and anyone else it wants, unchecked. We need to eliminate central banking and have money issued by the US government and no one else. Also there needs to be a larger requirement for raising the debt ceiling so that the government cannot spend us into oblivion without a certain majority. That way no one can stand around and point fingers and say its the democrats or the republicans that are at fault. Along with a balanced budget amendment would help keep things in check. Without central banking we could not have the warfare and welfare state like we do. Also maybe a requirement for any new legislation passed must have a way to pay for it. If we were actually being taxed for all of these programs and wars they would have been dead in the water a long time ago.

Why would it be nessasary that the supply of gold increase relative to GDP wouldn’t its value increase relative to the goods it was chasing benefiting the holders of the currency with appreciation instead inflation why do we assume the fed who’s board is comprised of members from major banking interest don’t skew they’re deciisions to benefit the financial sector by creating ever more avenues for inflating either directly or through fractional reserve banking by the use of bogus credit default swaps and other shenanigans to thwart the restrictions on inflation. Inflation is theft and those that control the mechanisms of monetary expansion and even how it’s measured are not representing those who give them they’re incredible authority over our society by the monopoly of the greenback .

Lara, thank you for attempting an objective approach to the gold standard thesis but you’re missing some key points. First, because commodity backed currencies (in this case gold) are basically tied to a finite resource that can not be counterfeited, a deflationary economic environment is created. This is for two reasons: in a competitive marketplace improvements in technology and productivity drive prices down for goods and services; and also, as population and wealth increase the demand for money increases therefore driving up the quantity demand (of a scarce resource) and therefore the strength of the currency.

Convention says deflation is bad because it will discourage consumption/encourage savings and hurt incomes. This is not true and/or a mischaracterization. The first fallacy here is that consumption is hurt by falling prices because consumers delay purchases; this may be true for some products that have no natural demand (cash for clunkers anyone?), but quickly consider the flat screen TV market- prices fall every year but consumers do not indefinitely put off their TV purchase. People want the utility of the good! Would you not eat or drive simply because it will be marginally cheaper tomorrow? In fact, the case could easily be made overall consumption increased in the TV market because falling prices made the product available to a larger base of consumers. Secondly, when did savings become a bad thing in an economy? Sustainable consumption requires a dollar saved for every dollar consumed. Credit and lending is simply a mechanism to efficient allocate scarce resources to productive sources. And because nobody makes money just for the mere sake of making money, a consumption first policy is simply trading consumption in the future with compounded effect for consumption today with compounded debt. Lastly in the “deflation is bad” myth is that incomes of workers would fall. This is intellectually dishonest, as the value in money does not come from its nominal value but rather from its purchasing power. You don’t care how many zeros are in your bank account, only how many cars/houses/food/entertainment/healthcare you can buy with it. Therefore it is more than possible that salaries could fall yet cost of living could fall faster, especially considering the difficulty in lowering employee wages, which means greater individual prosperity. Clearly deflation is not the villan bankers and Keynesian economist make it out to be, a little research will easily establish that the US’s most prosperous time in term of real increases in standard of living was post civil war with the reinstatement of a commodity (gold) backed currency from the fiat currency used durring the war.

Detractors of the gold standard and proponents of central economic planning, i.e. central banks (which I don’t understand why people don’t see as straight out of the communist handbook) will point to this same period as a time of economic uncertainty and financial crisis. This is also a malicious pseudo-truth used to justify the establishment of the Federal Reserve in 1913. The truth is, yes corporate wealth was erratic during this time as companies had to keep pace with rapid evolutions in technology and maintain competitiveness. This meant cashflows fell rather than rose every year at large companies unless they could continuously innovate (which economically awards the most competitive) which in turn threatened speculative equity investors and limited potential profits of major US firms (Standard Oil’s fields were getting less valuable rather than more valuable every year). So true, this period was not great for corporate profits but rather for the people who worked at these companies, ie the middle class. They profited greatly and saw their standard of living increase faster than any other accurately recorded time in American history. Furthermore, the financial losses of a less competitive firm stemmed from the new profits of several more competitive firms. The equivalent bourgeois of the time (think Robber Barron-esk) saw this constantly changing landscape as a social challenge to maintaining their hegemony/empire (which it was as financial success was based on your talent/competitiveness rather than your last name or access to lots of cheap credit) so they conspired to establish the Federal Reserve inorder to promote “price stability” as to maintain profits for the corporation but not the society. While this may sound like revisionist history it isn’t, the history of the Federal Reserve’s formation is no secret; financiers representing 1/4th of the world’s wealth met on Jekyll Island in 1910, in secret, to outline the FED reserve system (seriously just google it) But here I ask, what good is a corporation’s profits but to serve the ends of its stakeholders? Under the current system only shareholders are directly rewarded profits, and because few people are shareholders few people have benefited from inflation’s effect on nominal profits. This is why income disparity has constantly grown since the US exited the gold standard and inflation became a serious threat.

There is so much on this topic you could write a textbook but I hope this fills in some of the gaps in your understanding. Took me a long time to totally understand the thesis but once you flesh it all out it starts to make perfect sense… and you begin to wonder how you could ever have bought into the absurdity of fiat currency that depends on corrupt politicians to act responsibly and maintain its fiscal integrity. Their track record? The dollar has devalued by 98% since 1913.

I find the tone of this article quite childish. And the arguments incoherent. Starting off with saying that gold standard ‘fans’ believe they can achieve a ‘utopic state of economic stability’. Whoever said that? Only in the authors imagination. By no means do gold advocates claim that – far from it. But the fact that the author posits it so – shows a little childishness on her part.

Secondly trying to associate Apple, Facebook and Microsoft as if they have anything to do with coming off the gold standard – is completely laughable!

The author seems to have written an article based on feelings and sentiment rather than actual facts and research.

It’s like they compared ‘stuff we had in the seventies’, to ‘stuff we have now’ – and arrived at the conclusion that now is much better – So that vindicates coming off the gold standard!?

Lastly, believing yourself to be qualified enough to make blanket statements such as ‘…the world before fiat currency wasn’t inherently more stable…’ – just loses any credibility you might have had with any informed audience.

Tying innovation and creativity is a canard. I’m not 100% with Ron Paul about returning to the gold standard, though I am voting for him. Fiat money in not the cause of the world’s financial problems. The crux of the problem is that private banks (international banking cartel), not governments truly govern. Politicians just think they’re in control because they have a “bottomless” credit account to draw from, then strap the people with the debt payments which only gives the banking cartel more profit, power, and influence over each country, destroying national sovereignty.

The “federal” reserve act of 1913 needs to go, along with the national income tax which only serves to give wealthy and greedy megalomanics more influence over our county, which turning our people into powerless debt slaves.